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Pursuant to a congressional request, GAO reviewed issues concerning the pricing and marketing of fluid milk, focusing on: (1) the factors that influence the price of fluid milk as it moves from the farm to the consumer; (2) the portion of the average retail price of a gallon of fluid milk that is received by farmers, cooperatives, wholesalers, and retailers in selected markets across the country; (3) changes in farm and retail prices and their effect on the farm-to-retail price spread; (4) the way changes in prices at any given level in the milk marketing chain are reflected in changes in prices at the other levels; and (5) different retail pricing relationships that exist in selected markets among the four kinds of milk.

GAO noted that: (1) at all levels in the fluid milk marketing chain, prices are determined by the interaction of numerous supply and demand factors; (2) the supply available at any given level is influenced by: (a) the costs incurred by the entities involved in the production, processing, and marketing of fluid milk; (b) the government policies that establish minimum prices for unprocessed milk used to produce fluid milk; (c) competitive conditions in the marketplace; (d) the market power acquired by the entities involved; and (e) the price of milk; (3) similarly, the amount demanded at any given level is influenced by the size, age, and income levels of the population in the marketing area, and the prices of fluid milk and substitute goods; (4) furthermore, the prices that retailers receive for fluid milk are influenced not only by their operating costs and return on investment but also by other factors, such as the pricing strategies used by competitors; (5) from January 1996 through February 1998, for the 31 fluid milk markets that GAO reviewed, on average, farmers received 42 percent of the retail price for a gallon of 2-percent milk, cooperatives received 10 percent, wholesalers received 31 percent, and retailers received 17 percent; (6) however, the portion received at any one level in the marketing chain varied substantially among markets; (7) from January 1996 through February 1998, retail prices for a gallon of 2-percent milk remained constant or increased in 27 markets and decreased in 4 market; (8) in contrast, farm prices decreased in 27 markets and remained constant in 4 markets; (9) as a result of these price changes, the farm-to-retail price spread increased in 27 of the 31 markets over the 26-month period GAO reviewed; (10) changes in prices at any given level in the milk marketing chain were most often reflected in changes in prices at the next level, as might be expected; (11) similarly, changes in wholesale prices generally correlated with changes in retail prices; (12) in contrast, changes in prices received by farmers less frequently correlated with changes in retail prices than they did with changes in cooperative or wholesale prices; and (13) retail pricing relationships among the four kinds of milk varied significantly in the markets GAO analyzed.